Rossendale Borough Council v - Hurstwood Properties (A) Ltd & Ors

On a strike-out application, a business-rates avoidance scheme was arguably effective only if its leases were genuine, the statutory provisions did not permit the court to disregard them under the Ramsay principle, and the corporate veil could not be pierced merely because a company incurred liability in the first instance.

An artificial transaction is not necessarily a sham. A sham requires a dishonest common intention that the transaction should not create the rights and obligations it appears to create. However, it was arguable that the corporate veil could be disregarded where an artificial special purpose vehicle was interposed to divest the controller of an ongoing liability for business rates. The claims therefore disclosed reasonable grounds and were not struck out in full.

Two local authorities brought representative claims against companies involved in schemes intended to avoid liability for national non-domestic rates on unoccupied properties. The schemes generally involved granting leases to newly incorporated special purpose vehicles, followed by liquidation or dissolution.

The defendants applied under CPR 3.4(2) to strike out the claims on the basis that they disclosed no reasonable grounds. The pleaded issues were whether the leases were shams, whether the Ramsay principle applied, whether the corporate veil could be pierced, and whether the claims adequately pleaded liability following service of demand notices.

1. Strike-out approach. The court was not trying the claims. It had to decide whether the pleadings disclosed legally recognisable claims and whether the alleged defects justified striking them out.
2. Sham. Applying Snook v London & West Riding Investments Limited [1967] 2 QB 802, an artificial transaction is not necessarily a sham. A sham requires a dishonest common intention among all parties that the transaction should not create the legal rights and obligations which it appears to create. The pleadings alleged artificiality and an uncommercial purpose, but did not sufficiently allege that the parties had that dishonest common intention. The sham case therefore disclosed no reasonable grounds.
3. Ramsay. The leases were genuine transactions which transferred the immediate legal right to possession to the special purpose vehicles. The subsequent liquidation or dissolution did not itself re-vest possession in the defendants; a disclaimer was required. The Ramsay principle concerns purposive construction of statutory language and realistic analysis of composite transactions. It did not authorise the court to excise the scheme merely because it was motivated by avoidance of business rates. The principle had no arguable application on the pleaded facts.
4. Corporate veil. The court considered Prest v Petrodel Resources Limited [2013] UKSC 34. It was arguable that the present case differed from the situation in which a company merely incurred a new liability in the first place. Before the leases, the defendants were arguably subject to an ongoing liability for business rates, and the interposed vehicles arguably divested them of that liability. Whether the defendants controlled the vehicles, and whether the facts justified applying or developing the Prest principle, required disclosure and trial.
5. Demand notices. Liability for business rates arose before a demand notice, but the obligation to pay arose only when a valid notice was served under the applicable collection regulations. The local authorities had an arguable money claim, but should expressly plead the relevant notices for each hereditament and liability period.

The strike-out applications were therefore not allowed in relation to the pleaded corporate-veil and consequential liability claims. The sham and Ramsay arguments failed at the strike-out stage.

This was a first-instance decision on defendants’ applications under CPR 3.4(2) in two representative claims. The judgment itself records no earlier appellate decision.